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Here's Why Momentum Investors Will Love Cadence Design Systems (CDNS)

Zacks Equity Research
BP (BP) closed the most recent trading day at $41.86, moving -0.76% from the previous trading session.

Momentum investing revolves around the idea of following a stock's recent trend in either direction. In the 'long' context, investors will be essentially be "buying high, but hoping to sell even higher." With this methodology, taking advantage of trends in a stock's price is key; once a stock establishes a course, it is more than likely to continue moving that way. The goal is that once a stock heads down a fixed path, it will lead to timely and profitable trades.

Even though momentum is a popular stock characteristic, it can be tough to define. Debate surrounding which are the best and worst metrics to focus on is lengthy, but the Zacks Momentum Style Score, part of the Zacks Style Scores, helps address this issue for us.

Below, we take a look at Cadence Design Systems (CDNS), a company that currently holds a Momentum Style Score of B. We also talk about price change and earnings estimate revisions, two of the main aspects of the Momentum Style Score.

It's also important to note that Style Scores work as a complement to the Zacks Rank, our stock rating system that has an impressive track record of outperformance. Cadence Design Systems currently has a Zacks Rank of #1 (Strong Buy). Our research shows that stocks rated Zacks Rank #1 (Strong Buy) and #2 (Buy) and Style Scores of A or B outperform the market over the following one-month period.

You can see the current list of Zacks #1 Rank Stocks here >>>

Set to Beat the Market?

In order to see if CDNS is a promising momentum pick, let's examine some Momentum Style elements to see if this maker of hardware and software products for validating chip designs holds up.

A good momentum benchmark for a stock is to look at its short-term price activity, as this can reflect both current interest and if buyers or sellers currently have the upper hand. It is also useful to compare a security to its industry, as this can help investors pinpoint the top companies in a particular area.

For CDNS, shares are up 7.65% over the past week while the Zacks Computer - Software industry is up 0.97% over the same time period. Shares are looking quite well from a longer time frame too, as the monthly price change of 5.22% compares favorably with the industry's 0.85% performance as well.

While any stock can see a spike in price, it takes a real winner to consistently outperform the market. Over the past quarter, shares of Cadence Design Systems have risen 37.21%, and are up 70.19% in the last year. In comparison, the S&P 500 has only moved 12.05% and 12.36%, respectively.

Investors should also take note of CDNS's average 20-day trading volume. Volume is a useful item in many ways, and the 20-day average establishes a good price-to-volume baseline; a rising stock with above average volume is generally a bullish sign, whereas a declining stock on above average volume is typically bearish. Right now, CDNS is averaging 2,218,152 shares for the last 20 days.

Earnings Outlook

The Zacks Momentum Style Score encompasses many things, including estimate revisions and a stock's price movement. Investors should note that earnings estimates are also significant to the Zacks Rank, and a nice path here can be promising. We have recently been noticing this with CDNS.

Over the past two months, 4 earnings estimates moved higher compared to none lower for the full year. These revisions helped boost CDNS's consensus estimate, increasing from $2.05 to $2.10 in the past 60 days. Looking at the next fiscal year, 4 estimates have moved upwards while there have been no downward revisions in the same time period.

Bottom Line

Given these factors, it shouldn't be surprising that CDNS is a #1 (Strong Buy) stock and boasts a Momentum Score of B. If you're looking for a fresh pick that's set to soar in the near-term, make sure to keep Cadence Design Systems on your short list.


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